By Henry Hing Lee Chan

New Measures to Lessen Negative Aspects of Belt and Road Initiative

China
convened the first Belt
and Road Forum for International Cooperation(BRF) on May 14–15, 2017 in Beijing. The meeting drew 29
foreign heads of state and government, representatives from more than 130
countries and 70 international organizations. It was the highest profile international event on the Belt and Road
Initiative (BRI) since China started the program in 2013 under the name One
Belt One Road(OBOR).

At present, there are 65 countries in the BRI, accounting
for about 60 percent of the world’s population and 30 percent of global GDP. Chinese
President Xi Jinping described the BRI as the “project of the century” and the Los Angeles Times published an article
titled “Globalization 2.0: How China’s two-day summit aims to shape a new world
order.”

In the forum, China announced the following measures to
scale up support for the BRI:

Table 1. New Measures
Announced in BRF

Measures

Compared
with existing set-up

Contribute
RMB 100bn to the Silk Road Fund

36 percent of the previous fund of USD 40bn. The
fund has committed USD 4bn.

Contribute
RMB 250bn special lending scheme to China Development Bank

33 percent of end-2016 loan of USD 110bn to more
than 600 projects to the B&R countries.

Contribute
RMB 130bn special lending scheme to China Exim Bank

21 percent of end-2016 loan of USD 90bn to 603
projects to the B&R countries.

The
Chinese Ministry of Commerce also announced the following targets in the next
five years:

Table 2. New Economic Targets Announced in
BRF

Targets

Compared
with current performance

USD
2trn import from BRI countries by China

Average
modestly higher than RMB 2.4trn (USD 350bn) in 2016

USD
8trn total merchandise import by China

Average
the same as USD 1.59trn in 2016

USD
750bn outbound Foreign Direct Investment (FDI) by China

Average
12 percent lower than the reported USD 170bn in
2016 but higher than the actual USD 110-120bn in 2016

More
than 500 million outbound Chinese tourists

Average
18 percent lower than 122m in 2016

During the BRF, China signed cooperation deals
with 68 countries and international organizations, and these yielded 270
deliverables in areas such as policy coordination, infrastructure building,
trade, investment, finance, as well as people-to-people exchanges.

There
are two core economic issues under the BRI. The first is to promote trade.
China signed more than 30 economic and trade cooperation agreements during the
BRF, including a free trade agreement with Georgia; and energy deals with Saudi
Arabia, Azerbajian, and Russia. The second is to promote development through
cooperation on infrastructure projects, including concessional financing to
support countries in need.

The
list of countries attending the BRI and the official level of their delegations
serve as a barometer of their economic and geopolitical relationships with China.
There were seven heads of state and government from ASEAN nations who attended
the forum, and Thailand sent a five-minister delegation even though its Prime
Minister was absent. Most of the European countries sent their economic or
trade ministers to attend. The US upgraded the level of representation just a
few days before the forum, and the head of the US team was changed from Eric
Branstad, a Commerce Department advisor and son of the US ambassador-designate
to China, Terry Branstad, to Matt Pottinger, a senior director in the White
House. The Japanese delegation’s announcement was also at the last minute and
it was led by Toshihiro Nikai, Secretary-General of ruling Liberal
Democratic Party, and former PM Yukio Hatoyama.

The presence of some countries not in the BRI is
interesting. Argentina,
Chile, Kenya, the Swiss Confederation, Fiji, Greece, Italy, and Spain are not
among the BRI countries, and their attendance at the BRF may signal interest in
the expansion of the geographic scope of the BRI. According to Argentina’s El Cronista, the Argentinian President
brought with him an extensive list of infrastructure projects, including dams
and the upgrade of railways, with the aim of obtaining financing support from
China.

The notable absence from the BRI was India. The country’s
external ministry confirmed the country had received an invitation from China,
but declined to attend because the USD 46 billion China-Pakistan Economic
Corridor (CPEC) passes through Pakistan-occupied Kashmir — a territory in
dispute between India and Pakistan but under Pakistani control since 1946.
India also raised the issues that the BRI projects do not follow internationally-recognized
norms of good governance, rule of law, openness, transparency, and equality. They
also charged that BRI projects did not follow principles of financial
responsibility that ask loan-granting countries to avoid projects that would create
unsustainable debt burdens for the recipient communities. India cited the case
of Sri Lanka to support its claim. Numerous infrastructure projects negotiated
by former President Mahindra Rajapaksa saddled the country with debt estimated
at some USD 8bn and the country has negotiated a USD 1.2 bn debt-to-equity swap
of the Hambantota Port project. Indian also insinuated that the Pakistan’s CPEC
will probably suffer the same fate.

Russian President Vladimir Putin was asked to comment on
the charge that BRI only serves the interest of China and that recipient countries
will suffer from unsustainable debt burdens even though such financing carries
concessional interest rates and is long term in nature. It is understood that
China’s infrastructure loans are normally priced at 2-2.5 percent p.a and run
for 20-25 years. President Putin stated that infrastructure loans from China are
subject to bilateral negotiations and that Russia will not proceed with
projects that are not financially sustainable. One should not blame China for
the failings of the project.

The new approaches of separating aid from project loans,
getting more financially sound countries to participate in the BRI, and turning
the initiative towards greater multilateral participation, are all signs to
greater transparency and internationally-recognized rule-based norms.

The charges against the BRI caught the attention of the
Chinese government. These are new measures that aim to minimize these negative
aspects:

1. Expanding the number
of countries actively participating in the BRI will allow China to cherry-pick
financially sound projects in countries with strong current account positions.
This will not only ensure the external sustainability of foreign currency loans
of the recipient countries, but also future repayments of the loans to China.
The active involvement of ASEAN countries and other economically developed
countries is a good sign, as they are financially stronger in their external
accounts and readier to translate physical infrastructure into economic growth
and exports. The problematic countries have weak external current account
positions. The relatively small increase in capital and financial commitments
shown in Table 1 and the modest economic targets shown in Table 2 indicate that
China has realized that it is time to consolidate the BRI, and not keep in an expansion
mode.

2. The cooperation agreement signed between China and international agencies
with experience in finance and infrastructure, such as the IMF and World Bank,
will greatly enhance future governance issues with BRI projects. The slow process of turning the BRI into a multilateral
undertaking from the bilateral infrastructure development aid model will
enhance the long-term prospects of the BRI.

3. The setting up of a coordination office in the US embassy in Beijing to
facilitate the participation of US companies in BRI projects is the first
concrete support of the US to the rationale behind the BRI. The high-profile
meeting highlighted the importance of infrastructure as both a counter-cyclical
economic measure and a tool to enhance future national development. The widely
circulated Asian Development Bank report of the USD 22.6trn infrastructure
investment requirement until 2030 in developing Asia-Pacific countries means
the cake is sufficiently big for all participants in infrastructure
enhancement. The refusal of many European countries to sign off on the final
declaration because the issue of bid transparency was not mentioned in the
document should not be taken as a sign of Chinese insistence on selecting domestic
Chinese infrastructure builders in BRI projects.

4. The institution of separate funds for food aid for countries in need, the South-South
Cooperation Fund, and international cooperation, indicates the separation of
projects under two separate categories of aid and financially-viable infrastructure
projects. For poor members who propose projects that are not financially
viable, the BRI can channel their needs to aid-type funds under people-to-people
initiatives, while a much bigger financial pool will concentrate on handling
the requirements of financially-viable projects.

Aside from the doubts
raised by India and some commentators on the long-term viability of the BRI,
there are also persistent domestic doubts on the viability of the BRI. China
was the fastest growing economy in the last 38 years since the economic reforms
of 1978, and now ranks number two in nominal GDP terms. The per capita income
of the country is estimated at USD 8900 in 2017 and ranks number 74 in the
world. Chinese citizens now worry about the safety of loans extended overseas.
The new approaches of separating aid from project loans, getting more
financially sound countries to participate in the BRI, and turning the initiative
towards greater multilateral participation, are all signs to greater transparency
and internationally-recognized rule-based norms.

China was clearly
pleased with the results, and President Xi announced on May 15 that a second
Belt and Road Forum will be hosted in 2019.